What did Fred Goodwin do to lose his knighthood? The answer is obvious, you might think. He was the longstanding boss of a bank that blew itself up. He pursued the kamikaze acquisition of ABN Amro even after the banking crisis had exploded in 2007. The public purse had to find £45bn to save Royal Bank of Scotland from the knacker's yard and prevent a wider loss of confidence in the UK banking system. With a record like that, allowing him to keep a gong for "services to the banking industry" felt absurd. That is why few tears will be shed for Fred the Shred.

But Goodwin's specific failing is hard to pin down, as the Financial Services Authority found last year when it finally published its mammoth 450-page report into the failure of RBS. No enforcement action was taken against RBS directors, and Lord Turner, chairman of the regulator, struggled to explain why.

A legal case, he said, would have little chance of success because failure of a bank doesn't make its management automatically liable. A successful case would require proof of incompetence, dishonesty or a lack of integrity. The FSA ruled nothing could be done: some of the board's of the judgments were poor but RBS had ticked all the right procedural boxes and it had to be seen in context .

The forfeiture committee, it seems, requires a lower standard of proof of incompetence – perhaps rightly if knighthoods should be reserved for exceptional achievement. All the same, the action against Goodwin has the whiff of a politically motivated act designed to distract from the other RBS story: the £1m bonus, now waived, for chief executive Stephen Hester and the government's inability to contain the public fury. Goodwin, remember, regularly visited No 11 in Gordon Brown's time as chancellor – he is a reminder that the system failed on Labour's watch. Hence George Osborne, the chancellor, saying last night: "I think we've got a special case here of the Royal Bank of Scotland symbolising everything that went wrong in the British economy over the last decade."

There is, though, no thought of taking the knighthood of the RBS chairman then: Sir Tom McKillop, a stout defender of the ABN Amro deal. That gong was for services to the pharmaceutical industry (McKillop was boss of AstraZeneca), so perhaps that's why he is safe. Is that how the honours system works? You're safe if you succeed at one firm and get a knighthood, but then fail at another? That logic seems bizarre. Is that why Sir Clive Thompson retains his title? A shareholder hero for many years at Rentokil, the rat-catchers, he was later chairman of Farepak, the failed hamper firm that left thousands of savers out of pocket in Christmas 2006.

Goodwin, however, makes a fine lightning rod for public anger over the years of excess in banking. During his climb to the top he did not stop to make friends in an industry that, while accustomed to ruthless dealmakers, still has a strong club-like culture.

The 53-year-old was described in that same FSA report as a "somewhat cold, analytical and unsympathetic" figure. Alistair Darling, the former chancellor, wrote in his account of the banking crisis that Goodwin, was "an awkward person, clearly very driven, but always warily on edge".

He did not do "small talk", Darling recalled, following a visit from the then-boss of RBS just before Christmas 2007 – he had turned up at his Edinburgh home carrying a gift-wrapped panettone.

Even before he arrived at the Edinburgh-based bank in 1998, Goodwin had earned his Fred the Shred nickname after he slashed jobs during his tenure at Clydesdale Bank. By his early 30s, as an accountant at Touche Ross, he was battling with the liquidation of what is still regarded as one of the most complex bank frauds ever, BCCI.

He was headhunted by RBS in 1998 from Clydesdale, just before RBS, then unknown on the world stage, embarked upon the takeover of NatWest that was to win Goodwin international acclaim. In the City, his reputation – for a time at least – was for brilliance after a textbook execution of the NatWest takeover. Forbes named him businessman of the year at the start of the decade and he appeared unable to put a foot wrong.

It was 2004 – the year that he was handed his knighthood – that the mood turned. A takeover of a US bank, Charter One, irritated the bank's investors as being too expensive and a deal too far, the 26th since RBS began its takeover spree. Goodwin was dubbed a megalomaniac by one City analyst and was unable to embark on large-scale deals of the type he loved until 2007 when he launched the fateful bid for ABN Amro.

His apparent intransigence over the £16m pension pot that paid out some £700,000 a year did little to help his cause. After an outcry, he agreed for his pension entitlement to be halved. His reluctance to say "sorry" was also regarded as a sign of his arrogance as stories emerged of his largesse: the Falcon 900EX private jet – registration G-RBSG (RBS-Goodwin); fresh fruit was said to be flown in daily from Paris; there were hand-picked carpets and furnishings in the bank's £350m purpose-built mini-village, set in 40 hectares of woodland near Edinburgh airport, and opened by the Queen in 2005. Goodwin strolled the pit lanes at Formula One races, as RBS sponsored a racing team, and decorated his office with photos of himself with famous golfers, rounds having been played as part of other bank sponsorship deals. His decision to use a super-injunction to hide an affair with a bank employee from the media last year cemented his reputation as an unlovable character.

The humbling of Goodwin by taking his knighthood will, then, be a popular move and the official explanation that he had "brought the honours system into disrespect" may be applauded. But the application of this principle still feels arbitrary.